Formula One is one of the world's most popular and profitable sports, but can it expand in new markets while keeping its old fans?
Now that legendary driver Michael Schumacher has hung up his helmet after 15 seasons and 90 victories, when the 2007 season opens on Mar. 18, Formula One's millions of fans will be looking for the sport's next hero. While most eyes will be on the cars hurtling at speeds of 190 mph or more down the racetrack, some of the most interesting action will be taking place in corporate offices, far away from the checkered flag and the roar of the crowd.
Despite generating an estimated $4 billion in broadcast and licensing revenues in 2006 and attracting a worldwide audience of approximately 580 million, the sport's television ratings sagged at the beginning of the decade. Much of the reason can be attributed to Schumacher's dominance of the sport, which led to many fans' boredom with his seemingly inevitable victories. But there are other factors at work: a growing emphasis on safety to curb fatalities, rampant commercialism, hard times in the automotive industry, and the behind-the-scenes struggle over the ownership and direction of the sport.
In late 2005, CVC Capital Partners, one of Europe's largest buyout firms, paid a reported $1.35 billion for SLEC Holdings, the company that controls the commercial assets of Formula One from three banks, Bayerische Landesbank, JPMorgan Chase (JPM), and Lehman Brothers (LEH). It also acquired the 25% of SLEC owned by Bambino Holdings, the family holding company created by Bernie Ecclestone, the man who has effectively controlled Formula One racing since the 1970s. (The name SLEC is derived from the first two letters of the first and last names of Ecclestone's wife, Slavica.)
The deal, which was finalized in the spring of 2006 following approval by the European Union, was widely welcomed by aficionados, given CVC's experience in motor sports and the automobile industry. The company rebuilt the once-flailing Royal Automobile Club in Britain and also owned the international motorcycling series MotoGP.
The deal also paved the way for a high-profile reconciliation between the sport's organizers and the companies that build and race the high-tech cars, even as Ecclestone stayed on as the head of Alpha Prema, the CVC company that owns the commercial rights to Formula One. In May, the Grand Prix Manufacturers Assn., which is made up of automakers Toyota (TM), Honda (HMC), DaimlerChrysler's (DCX) Mercedes-Benz, BMW, and Renault, agreed that it would not break away from F1 as it had previously threatened. The agreement, which Ecclestone signed in May, 2006, increased the teams' share to 50% of the annual revenue generated by F1.
Now, in another twist, CVC has reportedly secured a $2.9 billion loan from the Royal Bank of Scotland and Lehman Brothers in a bid to protect Formula One's long-term future. This new infusion of cash is slated to help CVC consolidate the triumvirate of smaller companies—SLEC, Allsport Management, Allsopp Parker & Marsh—with management roles in the sport and make it possible for investors to begin taking money out of the company, securing cash on future revenues. More important, that would set up the sport's management to begin making investments in aggressive expansion into Asia and Latin America.
Though the sport's financial backing continues to evolve, the lucrative opportunities it represents have stayed much the same. In nearly every aspect, the sport means big money. Though still not widely followed in the U.S., where NASCAR is king, it remains one of the most popular sporting events in the world, putting it in the same league as the Super Bowl, the Olympic Games, and the World Cup.
Particularly historic races, meanwhile, can draw astonishing numbers. German broadcaster RTL, for instance, reported 14.8 million viewers for Schumacher's final race, the Brazilian Grand Prix, in October. That represented 40% of that country's television audience.
With that much attention focused on the sport's events, the advertising stakes are high. Corporate sponsorships range from $1 million to $50 million. A smaller, less exclusive spot on the cars themselves, usually occupied by industry engineering and parts suppliers, can go for $1 million to $3 million. For so-called co-sponsors, meanwhile, $3 million to $15 million buys more explicit, easily discernible advertising. And title sponsorship like those bought by Marlboro cost between $15 million and $50 million but also earn brands a top spot in the racing team's name.
Formula One may also be looking eastward, targeting more growth. The sport has expanded interest by holding races in the Middle East, China, and Turkey. India, with its booming population, could be next on the list. After signing a sponsorship agreement between Toyota and Kingfisher Airlines, Vijay Mallya, a prominent Indian businessman, suggested Delhi could be set to host a grand prix as early as 2009. Additionally, Formula One has promised South Korea a grand prix in 2010. Russia, South Africa, and Morocco have also been suggested as possible new venues.
Ferrari's New Era
Despite the news of the shifting financials and aggressive expansion plans, most of the attention is likely to go to the new purpose-built cars, most of which are being unveiled this month.
While Ford Motor (F) had to pull its Jaguar team from Formula One because of financial pressures facing the company, the remaining 11 teams are looking to find ways to increase performance without sacrificing safety. Most of the launch excitement, though, is centered on Ferrari, which has long dominated the sport but is entering a new era without the race-winning Schumacher at the wheel. On Jan. 14, the team showed off its new model, the F2007, with a long list of technical enhancements from a new front suspension system to a longer wheelbase (see BusinessWeek.com, 1/18/07, "Ferrari F1: All New for 2007"). Nevertheless, despite the impressive technology displayed by the automakers, many fans miss the 1980s when more powerful turbocharged engines dominated the field.
The crowd's bloodlust aside, now that the political infighting has quieted down and the jockeying to see who will be the next Schumacher has begun, F1 once again looks like a winner.
Click here to see how the 11 Formula One teams will stack up for the 2007 season.